Down 30%, Is This Slowing Growth Stock a Sell, or Is It a Buying Opportunity?

Shares of Prologis (PLD -1.57%) have plunged 30% from their peak last year. A big weight on the REIT's stock has been concerns about the effect of a slowing economy on its operations. 

The weakening economy is starting to impact the company's financial results. That's clear from its slowing growth rates in the fourth quarter and outlook for 2023. Here's a look at whether this is thesis-altering or if the sell-off is a good buying opportunity for investors with a long-term mindset.

Cooling off a bit

Prologis recently reported its Q4 earnings. Here's a snapshot of some of its key metrics compared to those it posted in Q3:

Data source: Prologis.

While occupancy improved and core FFO was a bit higher, rent growth and NOI had slowed down from their peaks in Q3 when Prologis posted all-time highs for those metrics. Net effective rent growth in the U.S. cooled considerably, falling from 67% in Q3 to 55% in Q4. The other factor was a notable difference between the tenant mix rolling off leases in Q3 compared to those in Q4. Meanwhile, there was a significant shift in NOI drivers as Europe led the way with 10.6% growth in Q3, while its U.S. operations were the leader last quarter at 9.6%.  

Overall, the company's numbers were strong amid a slowing economy. Demand continues to be robust while supplies remain constrained.That's evident in the improvement in occupancy. It averaged 98% in the quarter and ended the period even higher at 98.2%, its best level of the year. Those solid market conditions led Prologis to start another $846 million of developments in the period, more than half of which were build-to-suit projects for specific tenants.

The solid showing in the period enabled the company to end the year on a good note. Core FFO per share grew by 24.3% for the year, or by 12.7% after excluding promote income (its share of the profits for the real estate investment funds it manages). 

Another strong (but not record-breaking) year ahead

Prologis expects 2023 to be another solid year, though less strong than 2022. It expects a slowing economy to cause vacancy rates to rise, leading it to forecast average occupancy between 96.5% and 97.5%. However, due to the wide 67% gap between legacy lease rates and market rents, it projects to deliver healthy cash same-store NOI growth of 8.5% to 9.5%. It should deliver core FFO (excluding promotes) of $5.00 to $5.10 per share. This level implies a 9.5% increase at the mid-point, "representing strong growth, particularly in light of current economic conditions," according to comments by CFO Tim Arndt in the earnings press release. 

Given the uncertain economic conditions, the company plans to "continue to manage our balance sheet prudently, and therefore are able to navigate any potential headwinds," according to Arndt. It expects to start fewer developments in 2023 ($2.5 billion to $3 billion vs. $4.675 billion). It also anticipates limiting acquisitions to $300 million to $600 million after making over $2 billion of property purchases last year and acquiring rival Duke Realty in a $26 billion deal. However, the company does have $4 billion of liquidity and $20 billion of investment capacity to take advantage of opportunities should they arise. It also has a vast $39 billion land bank to support future developments as market conditions improve.

That land bank and the gap between legacy leases and current market rental rates should enable Prologis to grow steadily for years. The company sees lease rollover driving 8% to 10% NOI growth for the next several years. Meanwhile, it has an excellent track record of creating value through development.

Plenty of growth ahead

While Prologis' growth rate is slowing, it's still expanding at a leading rate. It has enough embedded drivers to continue growing core FFO (excluding promotes) at a high single-digit rate. Add in its 2.6%-yielding dividend, which it's also growing at an above-average rate, and Prologis should be able to produce strong total returns from here. That makes its sell-off look like a solid buying opportunity despite the slightly slower growth.